7/23/2019 ACCT 553 Week 7 HW Solution

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ACCT553

Week 7 Homework_________________________________________________________

Chapters 10-11-12

1. Please explain the istin!tion "etween a #reali$e# %ain an a #re!o%ni$e# %ain.

&5 pts'

A re!o%ni$e %ain is the amo(nt re!ei)e on a sale min(s the a*(ste "asis o+ thepropert, sol. n the other han the reali$e %ain is the amo(nt that is part o+ thisre!o%ni$e %ain whi!h will "e treate as in!ome an it is s("*e!te to tax on thesellers in!ome tax ret(rn./or example i+ someone owns a sto!k with a "asis o+ 35 an sells it +or 55 thenhe earns a re!o%ni$e %ain o+ 20 &55 - 35'. He !an also e(!t "rokera%e +ees

when eterminin% his a!t(al earnin%s +rom the sale o+ the sto!k. The nal earnin%sa+ter all !ost e(!tions e(al to his reali$e %ain. Here i+ the "rokera%e +ees are3 then the reali$e %ain is 17. 46 t,pi!all, taxes earnin%s "ase on reali$e%ains.

2. Are there an, limits to the e(!ti"ilit, o+ losses on sales an ex!han%es

"etween relate parties What !oe se!tion enes this limitation &5 pts.'

8o e(!tion is allowe on loss on sales or ex!han%es o+ propert, "etween!ertain relate parties. This was one to pre)ent transa!tions "etweenrelate taxpa,ers solel, +or the p(rpose o+ o"tainin% loss e(!tions to tax lia"ilitieswhen the propert, still remaine in the +amil,.

Howe)er an, isallowe loss ma, "e (se to o9set the %ain reali$e ",the relate p(r!haser on a later sale o+ the propert,. This o9set possi"ilit, isa)aila"le onl, to the ori%inal trans+eree.

:6 4 Coe 6e!. 2;7 enes this limitation.

/or example< Alex owne sto!k !ostin% 1;000 whi!h he sol to his son =o" +or13000. 8ormans 3000 loss is isallowe. 4+ =o" later sells the sto!k +or 1>000he will ha)e a %ain o+ 2000. His 5000 reali$e %ain is re(!e ", Alexsisallowe loss o+ 3000. 4+ =o" sells the sto!k +or 1?000 he oes not re!o%ni$ean, %ain. The 1000 reali$e %ain is wipe o(t ", Alexs isallowe loss. 4+ =o" sellsthe sto!k +or 10000 he has a 3000 re!o%ni$e loss &10000 less 13000'.Alexs isallowe loss oes not in!rease =o" loss "(t !an onl, re(!e the amo(nt

o+ %ain re!o%ni$e. 4+ the propert, sol was a personal (se asset &rather than sto!k'an sol at 10000 e)en the 3000 loss wo(l not "e e(!ti"le ", =o".

3. What is the "asis o+ propert, re!ei)e &i.e. new propert,' in a like-kin

ex!han%e What is the holin% perio +or the new asset &5 pts.'

7/23/2019 ACCT 553 Week 7 HW Solution

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There are two wa,s o+ %(rin% the "asis o+ the propert, re!ei)e &i.e. new propert,'

in a like-kin ex!han%e.

1. /irst metho starts with the a*(ste "asis o+ the propert, %i)en (p &Coe 6e!.

1031&'' as +ollows